hankyoreh

Feb. 8.

A crisis is manifesting itself in the world’s top shipbuilding industry. The reality in South Korea is matching the dire predictions made late last year by the U.S. daily Wall Street Journal, which wrote that “pain awaits South Korean shipbuilders” and that there was “little chance the industry here will avoid steep job losses and financial difficulties in the coming years.” Coming on the heels of last year’s situation, in which one small to mid-sized shipbuilder after another entered the workout system or court receivership, restructuring pressures in 2010 have been hitting the mid to large-sized companies as well. The shipbuilding business also faces bleak economic prospects for the year. The market for ship orders has once again withered after showing a “flash” of recovery in late 2009. Global ship orders for January amounted to a mere 34 vessels (624,285 compensated gross tonnage), less than half the orders for the previous month.

Despite various new orders recently, an executive with Daewoo Shipbuilding and Marine Engineering (DSME) said, “It is still too early to say that the shipbuilding industry has taken a turn for the better.” The outlook is growing bleaker with the current financial crisis facing Greece, which owns around 15 percent of the world’s merchant vessels. South Korean shipbuilders already felt the heat last year when France’s CMA CGM, the world’s third largest container shipping group, was faced with a bankruptcy crisis. Floating in the waters in front of the large shipbuilders are a number of vessels that are finished but have not yet found owners. Last month, after CMA CGM did not collect its container vessels for four months, Hanjin Heavy Industries and Construction cancelled its contract and sold the vessels to a third party. Clarkson Research, a research company that analyzes the shipbuilding and container shipping business situation, predicts that around 20 percent of the vessels being built this year will not be delivered as scheduled. In light of this, a deteriorating cash flow situation for South Korean shipbuilders appears inevitable.

For small to mid-sized shipbuilders, which sprang up right and left during the boom that began in 2003, the decline began a long time ago. Nine have applied for the workout system, including 21st Century Shipbuilding and SLS Shipbuilding. Of these, workout has been halted for three, including Kwang Sung Shipbuilding, and the situation for them has become so dire that wages have not been paid for several months. Last year, the government presented two plans for strengthening shipbuilding industry competitiveness, but those on the scene are feeling none of the warmth. A Ministry of Knowledge Economy official said, “There are practically no new orders, and even when there is an order, the small to mid-sized shipbuilders cannot compete with the Chinese prices.” The official added, “The crisis is unsolvable.”

The situation is also difficult for South Korea’s “big three” in the shipbuilding industry, Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI) and DSME. Orders declined some 80 percent in 2009 from the year before, and with the capital flow situation failing to live up to expectations, corporate bonds were issued for the first time in seven to eight years. While around two to three years worth of work remains, sluggish order numbers this year would mean there would be next to no vessels to build beginning next year and the following year. Perhaps feeling concerned about this, the other companies besides HHI and SHI have already entered a “dumping battle” with low-cost orders. Choi Gwang-sik, researcher with Kyobo Securities, said, “The winner will not be the one who receives a lot of low-margin orders while vessel prices are falling, it will be the one who can hold out until the recovery in 2011.” However, if the shipbuilding situation does not recover during 2010, those companies will not have the luxury of dismissing low-cost orders.

Yoo Byeong Se, head of the Management Support Department of the Korea Shipbuilders’ Association, said, “Even if orders increase somewhat from last year, it will not be enough to make up for an excessive construction equipment capacity, so it appears likely that difficulties for South Korean shipbuilders will continue in 2010 as well.”

Large-scale workforce cuts have already become a reality. According to HHI’s 2010 human resources management report, around 4,000 of its 17,000 employees, or close to 25 percent, become an “idle workforce” as of April. This is due to a rapid drop in ship construction quantities to half of last year’s levels. Facilities are becoming idle in addition to workers. One HHI official said there are plans to clear four docks after the company’s current bulk carrier construction project is finished, the first dock closure for HHI in the 2000s. Last month, it dismantled an on-land shipyard where it was building four vessels, and it is now using it as a yard for making ship blocks and marine equipment.

In-house subcontractors are already taking a direct hit. Four companies that were part of an on-land shipyard have closed, while some of the 180 or so in-house contractors in the shipbuilding sector signed forms late last year consenting to a 10 percent cut in hourly wages and a 50 percent cut in allowances.

The crisis facing the world’s top-ranked shipbuilding nation does not stem entirely from the slump in the global economy. Other factors include the situation that arose following the boom in the 2000s, when large shipbuilders got carried away with the boom and focused on bulking up rather than developing technology or new projects, while new shipbuilders cropped up everywhere. In addition, the in-house subcontracting workforce for the nation‘s ten largest shipbuilders increased nearly five times between 2000 and 2008, while there was only an increase of around 3,000 employees holding regular positions.

Please direct questions or comments to [englishhani@hani.co.kr]